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July 27, 2016, 4:06 A.M. ET

Nikkei Jumps On Stimulus Hopes; Will RBA Cut Rates?

By Robert Guy

Japan’s Nikkei was the standout performer among Asian markets on Wednesday on reports the government is close to unveiling a JPY28 trillion stimulus package aimed at reviving growth in the world’s third largest economy.

The Nikkei was up 1.7% at the close of trade, while the yen finished the day weaker at JPY105.5 against the U.S. dollar – it fell to JPY106.5 during the day – on reports from the Wall Street Journal that the Japanese government was considering issuing 50-year bonds for the first time. A 50-year bond would fuel concerns that Japan is embracing ever more unconventional monetary policy tools such as “helicopter money”, or the printing of money to finance government spending.

The moves to bolster the economy comes amid debate about what more the Bank of Japan can do to revive growth ahead of the end of its two day meeting on Friday. The central bank’s embrace of negative interest rate policy has been a debacle and that may tie BoJ governor Haruhiko Kuroda’s hands. Here’s a take on the issue from global advisory firm Teneo;

The BOJ could technically cut the interest rate on reserves deeper into negative territory, but given the controversy that surrounded the initial announcement of the negative interest rate policy and ongoing questions regarding both its effectiveness and its impact on financial-sector balance sheets it will still be difficult for Kuroda to introduce an additional rate cut.

The other big story of the day was Australia’s second quarter inflation data, which traders had expected would deliver a soft number and prompt the Reserve Bank of Australia to cut rates by 25 basis points to a record low of 1.5% at its board meeting next Tuesday.

Unfortunately, the data wasn’t as weak as expected and an easing next week is seen as a line-ball decision. Core inflation rose 0.44% quarter-on-quarter, beating expectations for a 0.4% increase. The year-on-year rate fell to 1.5% from 1.55% in the first quarter, although again it beat expectations for an increase of 1.4%.

Here’s what National Australia Bank had to say;

Today’s outcome will not see the RBA revising down its inflation projections as in May, while some evidence of exchange rate pass through may reduce concern the Bank had on achieving its forecasts. NAB’s assessment is that while a further rate cut will be considered at next Tuesday’s meeting – and while the outcome is likely to be a close call – today’s CPI does not demand a further adjustment, especially with non-mining GDP above trend, business conditions above average, and reasonable employment growth outcomes.

However, AMP Capital’s head of investment strategy and chief economist Shane Oliver reckons the RBA may cut rates next week to boost inflation expectations;

The June quarter inflation data is not low enough to make an RBA rate cut at next week’s meeting certain particularly given that recent economic data has been reasonably good. However, on balance we expect that the RBA will move again to help ensure that inflation expectations do not become entrenched below 2% as has been the case in several other countries, so that there is reasonable confidence that inflation will move back into the target zone in a reasonable time frame and to head off a rebound in the $A that will likely follow if it doesn’t cut again.

Meanwhile, the Shanghai Composite fell 1.9%, while the Shenzhen Composite tumbled 4.5% – its biggest one day decline since mid-June. The decline in Shenzhen was attributed to moves by the stock exchange to increase regulations.

About Asia Stocks to Watch

Barrons.com’s Asia Stocks to Watch blog analyses news and research from this vibrant and diverse continent, challenges conventional wisdom, and discusses investment ideas from Shanghai to Singapore, and from Indonesia to India.

Shuli Ren has written for Dow Jones Newswires on corporate strategies and Asia markets. Before becoming a journalist, Shuli conducted quantitative equity research at Lehman Brothers, and later Barclays Capital. She was also a consultant for Charles River Associates. She holds a CFA and FRM and studied economics at the University of Chicago’s graduate school.